The last Monetary Policy Committee (MPC) meeting saw a surprise shift in the plate tectonics among policymakers, with three of eight members voting for an increase in UK interest rates. The meeting however may be the hawks’ only hurrah for a long time yet. One of those voting for higher rates, Kristin Forbes, has now left the committee, and her replacement, Silvana Tenreyro, is likely to be a dove, having voiced her concerns about a balance between growing inflation and weaker output growth. Thus the balance is likely to shift back to 6-2, from 5-3.
Since then, Mark Carney, the Bank of England’s (BoE) governor, has become more hawkish, with his comments at the recent central bank conference in Sintra being viewed as making him more amenable towards tightening policy.
UK inflation dipped in June, according to data from the Office for National Statistics (ONS), falling to 2.6% from 2.9% in May, and breaking a sustained series of increases that had run since November 2016. Thus, one area of concern has perhaps lessened somewhat, with worries about excessive price growth and a potential wage squeeze alleviated by news that core consumer price index (CPI), which excludes food and energy prices, also weakened, back to its April level of 2.4% from 2.6% in May.
But overhanging all this is Brexit, the issue that won’t go away for a very long time. Deutsche Bank has argued that the BoE will not tighten monetary policy until the uncertainties surrounding Brexit (and there are many) have been reduced. The bank argues that even if the hawks did manage to push the committee further towards another rate hike, it would only see one rate increase before the end of the year, as the economy is not strong enough to tolerate more.
A shift in the Federal Reserve expectations for the rest of the year has driven the dollar lower, providing a boost for the pound and driving GBP/USD to $1.32, the highest level since mid-September 2016. The pair has seen a sequence of steady higher lows, with a post-March trendline being tested in June before the latest leg higher began. It would need a close back below $1.3050 to suggest that a retracement towards the rising trendline is in play, and only a close below $1.2775 would mark a real bearish tone here.